Households brace for toughest times since the start of the pandemic, confidence drops

Australians are still spending big bucks, but surveys suggest that could change quickly as rising interest rates send consumer confidence to pandemic lows.

Key points:

• Consumer confidence has fallen to the lows usually seen during a recession
• Soaring inflation and a sudden spike in interest rates to combat it weigh on households
• The slump in confidence has yet to feed through spending cuts, with various measures hitting record highs

The latest consumer spending data from the Australian Bureau of Statistics showed household spending was 7.9 per cent higher in May than a year earlier.

Much of the increase in spending is not because Australians have had to buy more, but reflects a spike in inflation, meaning people are paying more for most of the things they buy.

Transportation spending rose nearly 15 percent, as people once again took to the skies, but also as fuel costs soared.

Eating out and going out together has also seen a double-digit percentage increase in spending over the past year as pandemic restrictions ease and people become more confident about going out.

But transport and hospitality remain the two areas of household spending that have yet to recover to pre-pandemic levels (January 2020), while economic spending is about 10 per cent higher than before COVID-19 hit Australia.

A separate monthly index from the Commonwealth Bank, which combines internal data on Australian consumption habits with internet search trends, found that spending intentions remained around record levels.

The June Household Expenditure Intention index reading of 117.3 was the same record high, and was up 11.9 percent on last year.

However the increase was concentrated mainly in transportation (again reflecting higher fuel prices), as well as education and household services.

CBA chief economist Stephen Halmarick said there was already evidence that households were reducing in other areas.

“The interest rate-sensitive sector of the economy is clearly starting to show the impact of the Reserve Bank’s recent rate hikes, with discretionary spending on entertainment, home purchases and retail all declining in the month,” he said.

“With further rate hikes expected through the remainder of 2022, we expect to see discretionary spending weaken further in the coming months.”

CBA economists expect the RBA’s official interest rate to rise further from the current 1.35 percent to 2.1 percent by the end of the year, leading to slower economic growth and forecasts of a 15 percent drop in house prices by the end of the year. next year.

Confidence falls to recession level

The prospect of further rate hikes and falling house prices has shattered consumer confidence, which is near the pandemic lows seen during the early March-April 2020 lockdown.

The long-running and widely watched Westpac and Melbourne Institute consumer sentiment indexes fell another 3 percent to 83.8, well below the 100-point level indicated when optimism equals pessimism.

Westpac chief economist Bill Evans said confidence had fallen every month this year, and was at levels previously only seen during recessions or other major economic disruptions over the past few decades.

“The index has now fallen 19.7 percent since December 2021, a sharp decline comparable to the two-month decline during COVID (-20.8 percent); and the six-month decline seen heading into the global financial crisis (-29.7 percent). ; the recession of the early 1990s (-20.5 percent); the decline of the mid-1980s (-23.8 percent); and the recession of the early 1980s (-18.8 percent),” he said.

“Responses to our quarterly inquiries highlight the clear driver of weakening sentiment, with the most memorable news item being around inflation – about 60 percent of respondents recalled news on this topic compared to the long-term average of 12 percent.

“Other news areas to watch for are ‘domestic economy’ (43 per cent recall); interest rates (24 per cent); and ‘international conditions’ (23 per cent).”

The ANZ and Roy Morgan weekly consumer confidence surveys paint a very similar picture, with the index reading very pessimistic at 81.6.

RBA needs to adopt more ‘cautious approach’

The index fell a further 2.5 percent in a week in which the Reserve Bank raised interest rates by 50 basis points for the second straight month.

“The RBA’s 50 basis point rate hike last week weighed on sentiment, with confidence falling for people paying mortgages by a sharp 5.4 percent,” said ANZ senior economist Felicity Emmett.

“This continues the trend since late April when the March quarterly high inflation report brought expectations of a rate hike. Since then, confidence among mortgage holders has fallen 25 percent, while confidence for renters has fallen just 4 percent.”

Undoubtedly, borrowers making increasingly large mortgage payments were a major factor in the decline in households’ ratings of “current financial conditions” to near pandemic lows, with the impact of a spike in consumer prices also weighing on household budgets.

With inflation expectations rising—most consumers expect average prices to rise above 6 percent over the next year—and rates expected to rise further, it’s not surprising that households’ views of their financial position next year are also deteriorating.

Evans said the heavy loss in consumer confidence would give the Reserve Bank pause to think after what he hopes will be a 50 basis point rate hike next month.

“Cash rates have increased faster than we have seen in any cycle since 1994 and this is clearly troubling for consumers who are also facing sharp increases in the cost of living,” he said.

“A more cautious approach would be appropriate once policy shifts to ‘neutral’ in August.

“We encourage and expect [Reserve] The bank pauses to assess conditions, both domestic and global, before moving interest rates into the contraction zone later in the cycle.”

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